Tax Planning with Like Kind Exchanges by Karla Hopkins

A like-kind exchange provides a tax advantaged alternative to selling property. The sale of property may cause you to recognize a gain, which in turn may require the payment of taxes. A like-kind exchange, on the other hand, allows you to avoid gain recognition through the exchange of like-kind properties. The gain on the exchange of like-kind property is effectively deferred until you dispose of the property you receive. The IRS allows this tax-deferred transaction because it recognizes that just because you have exchanged one property for another, you should not have to incur taxable gains. Moreover, the deferral encourages re-investment and acknowledges that if you have re-invested your proceeds you may lack actual funds to pay tax on the sale of the original property. You will, however, have to recognize gain on any money or unlike property that you receive in the exchange.

Only qualifying property may receive like-kind treatment. To qualify, both the property you give up and the property you receive must be held by you for investment or for use in your trade or business. Buildings, rental houses, land, trucks, and machinery are examples of property that may qualify.

Like-kind exchanges provide a valuable tax planning opportunity if:

• You wish to avoid recognizing taxable gain on the sale of property that you will replace with like-kind property;
• You wish to diversify your real estate portfolio without tax consequence by acquiring different types of properties;
• You wish to participate in a very useful estate planning technique, or
• You would generate an alternative minimum tax liability upon recognition of a large capital gain in a situation where the gain would not otherwise be taxed.

The like-kind exchanges rules are very specific and very complex in terms of timing for identifying the property, completing the transaction and the handling of the proceeds for the transaction. Using a professional that is familiar with the like-kind exchange rules is important to ensure that the transaction is not disqualified and you are surprised by a tax consequence that you were not anticipating.